Wednesday, July 13, 2011

A Tale of Two Bottles

‘As a result, to paraphrase Adam Smith, though in each case the people engaged in any given transaction only seek to improve their own lots in life, the “invisible hand” of the economy works through these transactions to improve the lives of countless others.’

CommentBefore this paragraph, Dennis Behreandt writes a brilliant dissection of the moral outrage of fellow diners, one of them an economist, no less, who are outraged that Congressman Paul Ryan (GK: Who is he?) and two friends consumee two bottles of imported French wine at $350 a bottle while there are poor people in the USA not present at the restaurant. But the ‘outraged’ economist and her partner are also present in the restaurant! (But drinking water though presumably eating the expensive food).

I have no quarrel with Dennis Behreandt’s dissection of the economics of the purchase of expensive imported wine – a classic reminder of the real benefits to society of such production processes and trade between countries.

However, I balk at the assertion – wrapped in a ‘paraphrase’ – that the “invisible hand” of the economy works through these transactions to improve the lives of countless others.’ Economies work to that end, not ‘invisible hands’!

Also, that is not what Adam Smith actually said. In his single example in which he used the metaphor of ‘an invisible hand’ in Wealth Of Nations (see Book IV, chapter ii, paragraphs 1-9, pp 452-6), he described how some, but not all, merchant traders preferred to invest locally in ‘domestick industry’ rather than send their capital abroad in the ‘foreign trade of consumption’ and that it was their ‘concern for their own security’ (today we call it their ‘risk aversion’) that led them to do so. That insecurity was the object of ‘an invisible hand’ leading them to act thus!

Now metaphors, taught Smith, are used to ‘describe in a more striking and interesting manner’ their objects (i.e, what they are metaphorically representing). It was their ‘insecurity’ that led them to invest locally, not the ‘economy’ that ‘led them’, because multiple motives are at work on individuals in an economy - not everybody is ‘insecure’ to the same degree and many of them do engage in foreign trade (hence, the French wine bottles in fancy in DC restaurant at $340 a bottle).

The economy exists and ‘insecurity’ exists in the perceptions of the insecure merchants – THERE IS NO ‘INVISIBLE HAND’ IN THE ECONOMY. To assert that there is an invisible hand misreads Smith’s meaning.

It is also nonsensical of Smith’s meaning because the economy consists of myriad people, not all of them sharing the same ‘insecurity’ of the example provided by Smith! Many merchants did and do invest abroad, despite the insecurity felt by some others. What ‘invisible hand’ leads them to contradictory actions? Where is the term for the invisible hand in any of the equations of the mathematical models of modern economists?

Merchants, of all kinds, act from many motives not because of invisible hands but from their noting the very visible prices that are absolutely necessary (and, indeed, absoliutely sufficient) for a market to form and do its work.

There is no mystical invisible hand at work. It is not the ‘hand of god’, etc., that drives markets. Prices are sufficient, and Adam Smith outlined a plausible analysis of how prices work in an economy (albeit wrapped in the fairly cumbersome language of ‘natural’ and ‘market’ prices) through ‘supply’ and ‘effectual demand’ in Books I and II of Wealth Of Nations, without mentioning anything about ‘invisible hands’.

Most modern economists dismiss concerns about their misrepresentation of Adam Smith’s use of the invisible hand metaphor. They have adopted an invented ‘useful’ meaning to the restricted meaning that Smith applied, and they ignore not only what metaphors mean, but also what Smith actually confirmed in Book IV of Wealth Of Nations and what was the role of metaphors in literate English (and ancient Latin and Greek) in his Lectures on Rhetoric and Belles Lettres, [1763], 1983, p 29).

But still, read Dennis Behreandt’s interesting piece (follow the link). It does not need a myth about invisible hands to be an excellent exhibit for the benefit of markets.

6 Comments:

Behreandt's analysis is unintelligent, in the literal sense of that word - failing to discern what is relevant. The outrage is not about somebody drinking expensive wine while poor people are suffering. The outrage is that a congressman who presents himself as a highly moral and principled conservative was comfortable being dined and wined in a way that clearly violates the law. When caught in the act, he paid for one bottle, which probably gets him off the hook legally, but does nothing to save his face ethically. First, he obviously didn't intend to pay the bill (he said himself that he didn't know how much the bottle cost). And if he had intended to pay for it, you'd have to wonder how he could afford it on his congressional salary (which is $174k/yr). Second, all we know is that he charged the bottle on his credit card; nothing precluded Asness from making it up to him in cash later - indeed, anyone with common sense would expect exactly that to have happened.

Dennis Behreandt wrote the piece and my comments were directed at his repeating the invented myth of Adam Smith and 'an invisible hand' metaphor.

It was not primarily about the Congressman - though I found it ironic that the lady complainer was also eating in the expensive DC Restaurant. That article certainly mentioned the plight of poor people.

I have no idea who the Congressman is, or his salary, or the purpose of the meal, though with this week's obsession in the UK over press/politicians' relations, I can only guess what was going on in the background.

It is standing policy on Lost Legacy not to comment on any country's politics except that of the country in which I vote (Scotland).

Thank you for your observations. Behreandt may be, as you assert, 'unintelligent' (I cannot possible judge the merits of that view, but the rest of the article, other than the assertion about Adam Smith, is certainly a good read - nearly as good as the famous 'I, Pencil' classic of yesteryear.Gavin

I understand what the main purpose of your post was, and I find your discussions of Adam Smith very interesting and informative.

However, when a real-world event is used as motivation for a discussion, the description of the event, or inferences drawn from it, should not be misleading.

Certain facts are easy to find. For example, Paul Ryan is a Republican congressman, chair of the Budget Committee of the House of Representatives and author of several proposals to radically cut government spending on social insurance. Congressional salaries are set by public law. Paul Ryan's image as a 'regular guy' may take a bit more search to verify, but should also be easy.

Also, the "irony" you find in the fact that the economist who confronted Ryan and reported on the event was eating in the same restaurant seems to rely on the assumption that everything in that restaurant is similarly priced. That assumption is unfounded and easily refuted, as the restaurant's menu and wine list are online. Wine bottles start at $32; the wine that Paul Ryan was treated to is, at $350, tied for the most expensive red wine on the list (one white and one Champagne are even more expensive).

We seem to be getting into a tangle here. I was only commenting en passant on the irony of what was an irate person complaining about someone (a Congress man, no less, presumably with a private source of income other than his salary) consumes expensive wine. At $350 that is expensive, though I recollect being at dinner in a restaurant with a professor in California some years ago where the French wine was $250 a bottle, which also is expensive as I can testify, part living in France in a notably excellent wine area where excellent wine is a regular tenth of that. I too was slightly shocked when the professor ordered the, to me, expensive wine. [I stopped drinking all alcohol in 2005 on my retirement.]

However, I doubt if many poor people can afford (or would want to) eat in that fine restaurant with the cheapest wines on that menu above their income.

You seem to have a beef with Paul Ryan, no doubt justified, but I do not know him nor his politics, and, anyway, I regard them as none of my business - he isn't running for the Scottish Parliament.

I was struck by the irony to me, as I described, that's all. My main point was about the economic content of Behreandt's analysis with, which I recognised as a scholar of Adam Smith's work, is fully implicated in Smith's approach.

Smith was well short of being the ideologue about markets and society as presented in US campuses.

In Scotland we tend to be more aware of the subtleties of his Works. Certainly, I am not a misreader of him as an extreme laissez-faire advocate or as being totally hostile to an important role for government in the wider economy. His economic were closely bound with his moral sentiments, as I try to show on Lost Legacy.

Let me be clear that I have nothing but admiration for your discussions of Adam Smith's ideas and am grateful that you are sharing them on your blog.

My comments, however, have been about specific facts which, while clearly peripheral to your writing, are nevertheless real facts that matter to real people. And I am afraid you have become an unwitting accomplice in a campaign of smearing a person whose only fault was being a good citizen.

The "irate person complaining" reported, and documented, probably illegal behavior by an elected official. I would say that citizens holding officials accountable is a necessary condition for functioning of a democracy. Accusing that citizen of hypocrisy based on selective reading of the report and unfounded assumptions about the citizen's behavior has the effect (however unintentional) of supporting corruption of public officals.

Finally, whether I have a "beef" with Congressman Ryan should not be relevant, but your assertion is not grounded in any evidence available to you, as I have not offered any personal opinions of Mr. Ryan, but only facts relevant to the event and publicly available information about his background. In the interest of disclosure, however, I do not personally know any of the people involved in the events; I oppose the politics of Mr. Ryan in general and especially his economic arguments; and I always view corruption allegations the same way, regardless of the politics of the official involved.

I think we have entered the end phase of our discussion in that we are talking past each other. The issue that I commented upon is quite peripheral to the objects of Lost Legacy and little purpose will be served by exploring it further.

Congressman Ryan plays zero role in my world view and I have no interest in his behaviour - my opinion of the politicians I do know about is very mixed and I am wary of critics of individual politicians that appear to me to be somewhat selective (often resorting to the 'Blind-eye' technique practiced by Lord Nelson at the Battle of Copenhagen). Apologists for any ideology are disagreeable in my view.

I have no knowledge of the people involved in this incident nor of the laws in the USA regarding having dinners with family, lobbyists, or convicted criminals, etc., or of what they spend in private entertainment.

I do know that Adam Smith regularly had dinners with friends (members of the Scottish Enlightenment) where French claret and beer was drunk, whilst employed as a Scottish Commissioner of Customs (including the Prime Minister and other worthies in a splendid private house in London on one occasion at least).

Other than that I have nothing more to say on this particular matter. Should you wish to comment on any of the material in Lost Legacy, you are most welcome to do so. Meanwhile, thank you for your kind comments on the 'good' (I hope) work that Lost Legacy does.